Smart Online seeks public exit for investors

DURHAM - Investors wanted to see the technology company flourish, so they put a few million dollars into it last year.

Now, they want out. And they want the public to buy their ownership.

Welcome to the world of public stock offerings - through the backdoor.

Founders of Smart Online, a small Raleigh company with about $1 million in annual revenue, believe the firm is worth $70 million, and soon they will sell that belief to the public.

Why?

Because more than 20 of Smart Online's investors who collectively own about 2 million shares of the stock want to cash out. The company, in working to fulfill a promise to accommodate them, has gained permission from the U.S. Securities and Exchange Commission to register the shares.

Smart Online now is awaiting approval from the Nasdaq stock market to list the shares on Nasdaq's Over The Counter Bulletin Board. And company President Michael Nouri is in touch with Wall Street securities houses to find a market maker for the shares.

The company hopes the shares could be sold for at least $5 each.

Among investors who want to sell their shares are J. Fielding Miller and David Perkins, two men who run CapTrust Financial Advisors in Raleigh. Also seeking an exit is one of Smart Online's largest shareholders, Tryon Capital Partners, a small Chapel Hill-based merchant banking firm run by Pete Coker.

Though the company has sold a total of about 14 million shares through its 12-year history, only 1.96 million would be offered on the OTC Bulletin Board. Even though Smart Online would not receive any proceeds from the sale, the move would allow the company to boast that it is public, says Nouri.

"This is a long plan that has come to reality," says Nouri.

In listing with an exchange, Smart Online would satisfy a pledge it made to investors in 2004, when they put about $7.5 million into the company's coffers. Those shares were sold over time and included a commitment that investors would have access to a market where their shares could be sold.

"This (the promise of liquidity) is a good way to get the best valuation for the company," says James Verdonik, a lawyer who represents Smart Online. "There is no way they would have gotten this kind of a valuation from venture capital firms."

Smart Online, which has burned through $36.4 million since its inception in 1993, now employs 25 people. The company recorded a net loss of $2.4 million in the first nine months of 2004 on revenue of $723,000, according to the prospectus filed with the SEC on Feb. 18.

In the future, the company could issue additional public shares to finance such moves as an acquisition, says Nouri. "The company plans to issue shares based on its business plan," he says.

Smart Online has yet to decide on a trading symbol for its listing. The OTC Bulletin Board has less stringent requirements on matters such as trading prices and daily volume than the main Nasdaq market.

Smart Online's filing amounts to an SEC registration, but the company cannot be considered to be public until its shares actually trade. "There's got to be fluidity on a stock," says Chris Lynch, a securities lawyer with Wyrick Robbins Yates & Ponton. The question is "whether they can attract the interest of analysts" and others who would buy and sell shares, says Lynch.

Smart Online also says it has settled with the Internal Revenue Service an employment tax liability claim the federal agency had slapped on the company. Smart Online agreed to pay $26,100 to settle the $560,000 IRS claim.

Nouri, along with his brother Henry Nouri, who is a vice president at the company, and other directors and officers own 40 percent of the company's shares.

Smart Online in its early days sold its software through retail chains such as Circuit City and Best Buy. Since 1998, the company has reworked its strategy and now sells its applications only through the Internet.

Focused largely on servicing the needs of small businesses, Smart Online offers several applications, including ones focused on creating business plans and others dealing with human resources issues.

In the past few years, the company has partnered with banks, including Chicago- based Bank One, to manage their online presence with the goal of attracting customers to conduct more of their transactions through the Internet.

Many of those arrangements were signed at dirt cheap rates for clients, allowing Smart Online to build a base of thousands of customers. The company now plans to begin charging for those applications, a move Nouri believes will ramp up revenue.